Should you take the risk out of your pension before retirement? Six steps to help you decide how to invest

Derisking: This involves your pension fund moving money from stocks into corporate and government bonds and cash

People nearing retirement traditionally switch savings out of risky investments and into safer assets, but pension freedom reforms are likely to prompt a big rethink of this practice.

That's because derisking your pension savings - or 'lifestyling' them, as it's known in industry jargon - is normally done in preparation for buying an annuity.

But under Chancellor George Osborne's pension changes, which kick in next April, people are being freed from having to buy annuities, which provide a guaranteed retirement income but have come in for heavy criticism for being poor value.

As people get far greater decision-making power over how to spend, save or invest their own pensions, many more are likely to shun annuities and opt for an investment product that lets them draw down money from their pot gradually over the course of their retirement.

So it might be more sensible not to derisk, which usually involves your pension fund automatically moving your money from stock market-linked investments into corporate and government bonds and cash during the 10-year run-up to your retirement.

Instead, it might be better to avoid, delay, or even call a halt mid-way through the process and stay with shares-based investments, which are riskier but offer the opportunity for higher growth to maximise your savings.

Another issue to consider is that the supposedly safer corporate bond funds your pension provider is moving you into might turn out to be a lot riskier and harder to access than you bargained for, right when you're about to retire. Read more here about why investing experts are worried about the threat of a 'bond shock'.

We asked financial experts Brian Dennehy of FundExpert.co.uk and Patrick Connolly of Chase de Vere what you should do about derisking before retirement. And we run through some practical steps you can take when making up your mind.

Stay flexible about derisking: Interest rate rises might make annuities more attractive again

Derisking is suitable for people who plan to buy an annuity when they retire, but not if you are thinking about drawing down an income from your savings, according to Dennehy.

'There has to be a question mark over derisking if you aren't going to buy an annuity. How will you generate income in retirement?' he says.

'Derisking is misconceived in my opinion, unless someone is going to buy an annuity. The issue is how to generate income, that also grows. The only way is in some stock market-linked investment.'

But Dennehy suggests people stay flexible and keep their options open in the run-up to retirement, because if interest rates begin going up after being frozen at 0.5 per cent for years, annuities might start looking more attractive again.

Dennehy has been vocal about warning people approaching retirement whose investments are being switched into supposedly safer corporate bond funds to be wary about the risks.

He says holding some proportion of your investments in bond funds is fine, but he advises exploring other options such as commercial property funds.

Dennehy says: 'The only volatility-free and liquid asset class is cash. You might get very little, but the alternative is you might be 20-30 per cent down or not able to get hold of your money.

Safety first: Beware that you could end up taking too much risk OR too little

'We live in the most extraordinary times in terms of the overvaluation in shares and bonds. There isn't an asset class that's screaming "buy me I'm cheap".'

Dennehy advises people who do decide to let their pension provider derisk them automatically to stay on top of the process.

He says derisking tends to be carried out in a 'one size fits all' way, but you should question what exactly is involved, how fast it will happen, what your money will be moved out of and into, and what your portfolio will look like in the last five years before you retire.

Dennehy says you might be able to intervene and derisk your own savings, so find out about the range of investment funds available in your scheme.

But he cautions that some providers might not let you do it yourself, and if you leave you should check any exit penalties or charges, plus what other employee benefits are linked to you being a member such as life insurance and permanent health insurance.

'In the last 10 years you have really got to start paying attention to make sure you understand what is going on and engage with the whole subject, understand the risk and rewards,' said Dennehy.

DIY derisking means people could make big mistakes

'Generally as people get older and as they accrue larger sums of money they want to reduce risk, so capital protection becomes as important if not more important than capital growth,' says Connolly.

But he points out that most people saving for a pension annuity have an end point in mind.

'People have wanted to stop investing and buy an annuity, and so people's investment approach has usually taken account of that. So in the run-in to that point they are taking very little risk.

'What is going to be happening more now is people will stay invested in their pensions for longer. So they might start taking benefits but they are more likely to leave money invested, which means they can take more risk, derisking little or not at all.

'For many people there will be less of a need to derisk. For others they will be making these derisking decisions themselves in terms of how to do it.'

Connolly acknowledges that DIY derisking means people could make big mistakes, saying: 'There is always the risk they are going to get it wrong. They might end up taking too much risk or too little risk.

'That last point is really important. People might need to remain invested for 30 years after they start taking pension benefits. It's a case of getting the balance, getting long term returns, and enough security to provide protection.'

Connolly believes people should see an independent financial adviser about pension investing, but if you're doing it on your own he suggests checking your investments every six months.

He says you can get away with annual monitoring when you are younger and have less money, but as you rely on your portfolio more in old age six months is a better time frame to use.

'It doesn't mean you are going to make changes every six months, but understand where you are,' he says.

Connolly reckons some people will simply stay invested in their existing pension scheme because it's easier to leave things as they are than to change, but he doesn't advise doing this.

'It's a very dangerous option,' he says. 'Pension rules are more complicated. It's great there is more flexibility but there is more scope to get it wrong. Just leaving it alone, you're relying on luck to get it right.'

Open mind: Be prepared to switch strategy, especially if interest rate rises start making annuities look more attractive again

Should you derisk or not? Six steps to help you decide

ONE Ask your pension provider when they plan to start derisking your savings under any automatic lifestyle system. Normally this is 10 years before you retire, but it'll be useful to have a deadline for whether to continue with or halt the process.

Even if your pension provider has already started derisking your savings, you can still switch back into riskier stock investments with the chance of better returns. And if you have delayed derisking, you can always start it later.

TWO How much money you have put by for retirement should influence your thinking on whether it is more sensible to buy an annuity or to stay invested and gradually draw down from your savings.

Those with less may be better off with an annuity but those with more generally have further options.Read more here about what you should do with different-sized pension pots.

THREE Keep an open mind about what you are doing. If you start derisking, be prepared to slow or abandon the process if you decide to go for drawdown instead.

And even if you think you are definitely going for drawdown, it's worth keeping an eye on annuity rates as they might improve again if interest rates go up.

FOUR If you let your pension provider derisk your savings, bear in mind that they might be transferred into corporate bond funds.

These carry a greater risk than usual at present, so weigh up whether you want to take it or not. If you don't, it might be better to take more of a hand in derisking your own savings. Read more here about the bond bubble, and alternatives to traditional corporate bond funds.

FIVE The brutal truth is freedom sounds great, but it also means more decisions will be left up to you in future.

A free official service will be available to offer general guidance, but it won't give personalised advice. It certainly won't tell you what funds to put your money in, whether you are derisking or not.

Since funding your retirement is so important, you should therefore consider if you can afford to see an individual financial adviser.

Financial advisers come in for a lot of criticism for giving poor advice and overcharging clients, but if you can find a decent one it might be worth stumping up their fees to get your finances in order at the start of retirement.

SIX If you can't afford help or don't think advice is worth the cost, you will have to do your own homework.

Even if you've never been the slightest bit interested in investment funds, remember how much money you have tied up in your pension, and how reliant you might be on it in your old age, when you're a lot less able to make money decisions than you are now.